A recent editorial in the Arizona Daily Star takes the view that payday loans should be outlawed in Arizona, as scheduled, in 2010. Payday loans are very small loans that accept future paychecks as collateral and charge high fees and rates of interest. .
While I agree with the Star that it's not good for people to be using payday loans on a regular basis, I think the choice should be left to individuals, not government. Generally, it's a bad idea to finance a business startup with credit cards. But I know a millionaire who did exactly that to get started in the highly competitive restaurant business. Just exactly what similar opportunities might be lost if payday loans are made illegal I can't say. I can say with certainty, however, that they're out there.
It's worth noting, I think, that a recent study shows that the payday loan business is only moderately profitable, with a return on equity of about ten percent. This is due to high overhead and high default rates. Lenders take a risk on risky people.
By outlawing payday loans, the government is drying up a potential capital resource for the people who need it the most.
Goldwater Institute: Payday Mayday
Arizona Star: Payday loan campaign lacks credibiility
The Profitability of Payday Loans by Paige Skiba of the Vanderbilt University Law School and Jeremy Tobacman of University of Oxford